In many cases, the end of the year gives you time to step back and take stock of the last 12 months. This is when many of us take a hard look at what worked and what did not, complete performance reviews, and formulate plans for the coming year. For me, it is all of those things plus a time when I u...

Effective rents for new leases in the U.S. apartment sector climbed 3.0
percent during 2012, according to MPF Research, an industry-leading
market intelligence division of RealPage,
Inc. (NASDAQ: RP).
The annual rent growth pace slowed throughout the year, after the rate
of increase reached 4.8 percent in 2011. MPF Research analysts highlight
the nation’s latest apartment rent growth statistics as well as other
key performance indicators that include a big jump in the number of
units that will be delivered over the course of the near term in a
discussion found at www.realpage.com/MPFQ4-2012-Report.

Rent growth over the past year remained a bit above the long-term norm
of 2.5 percent recorded during the past two decades. An increase of 3.0
percent is similar to the average results posted during past periods
when occupancy was sustained at strong and generally stable levels,
according to MPF Research. Comparable annual price increases registered
most recently from 2005 through the middle of 2008, and before that in
the middle to late 1990s.

While U.S. apartment rents declined on average by a little more than 4
percent during the recession, they now have been moving upward for three
full years. Late 2012 pricing topped the rates recorded in late 2009 by
10.5 percent.

“Property owners and operators generally aren’t pushing rents quite as
hard as they were a year or so ago,” said Greg Willett, MPF Research
vice president. “Many on the operations side of the apartment industry
have focused on sustaining their very tight occupancy levels during a
period when job growth and new household formation have been fairly
sluggish at the same time that renter movement has begun to inch up from
the unusually low levels experienced in the previous few years.”

More renter movement in the apartment sector mainly reflects households
opting for one apartment over another, according to the MPF Research
analysis. Loss of renters to purchase in the now-improving for-sale
housing market is having only a very small impact on apartment sector
fundamentals, the firm’s research shows. “While the number of apartment
renters opting to buy is rising a little, it remains far below the
levels apartment operators were accustomed to prior to the recession,”
Willett said. “Families that have been renting single-family homes,
rather than apartments, comprise a big portion of the first wave of
homebuyers seen in the cycle. By far the biggest component of the
apartment resident base, particularly within large urban areas, consists
of young singles living alone or young-couple households. Single-family
homes just aren’t the right housing option for many of them, regardless
of shifts in the pricing relationship.”

Locations experiencing the biggest jumps in the loss of apartment
renters to purchase, in fact, tend to be places where the apartment
sector’s overall performance is running above the national norm. The MPF
Research analysts cite Texas, the Carolinas, Nashville and Denver as key
examples. “The most pronounced comebacks in the for-sale housing market
are seen in spots where the overall economy is doing the best,”
according to Willett. “That means job additions and new household
creation volumes are strong enough to quickly replace any apartment
renters lost to purchase. The locations where people are buying homes
are the same locations where recent college graduates are getting jobs
and young adults who have been at home with their parents are now able
to move out and live on their own.”

Average occupancy of 94.9 percent registered in U.S. apartments at the
end of 2012, up a tiny bit from the reading of 94.7 percent recorded at
the end of 2011. End-of-year occupancy backtracked from the third
quarter level of 95.4 percent, reflecting normal seasonality in the
performance. When the nation’s apartment occupancy rate bottomed during
the recession, the late 2009 figure was 92 percent.

Demand for 112,900 apartments was posted across the country’s 100
largest metros in 2012, according to the MPF Research data. That product
absorption figure mildly surpassed completions totaling 91,500 units but
was a little less than half of 2011’s demand total and just a bit more
than a third of 2010’s unusually strong absorption result.

“It’s not a coincidence that demand eased to levels near the delivery
numbers in 2012 for the nation as a whole and across most individual
metros,” Willett said. “With the existing stock basically full almost
everywhere, the only net absorption of units that could occur in many
areas was limited to the demand that came from getting still-limited new
supply through the initial lease-up process.”

Among large individual metros, the three Bay Area markets of San
Francisco, San Jose and Oakland ranked as the country’s rent growth
leaders in 2012. Effective prices for new leases jumped an even 8.0
percent in San Francisco, while upturns proved nearly as strong at 7.7
percent in San Jose and 7.1 percent in Oakland.

With pricing up 5.9 percent, the Denver-Boulder area was the nation’s
next-best performer, followed by Nashville and New York which each saw
rents jump 5.1 percent. Rents climbed 4.8 percent in Houston, 4.6
percent in Charlotte, 4.4 percent in Portland, and 4.3 percent in
Seattle-Tacoma.

Rent Growth Leaders in 2012

Annual

Rent

Rank

Metro

Growth

1

San Francisco

8.0%

2

San Jose

7.7%

3

Oakland

7.1%

4

Denver-Boulder

5.9%

5 (tie)

Nashville

5.1%

5 (tie)

New York

5.1%

7

Houston

4.8%

8

Charlotte

4.6%

9

Portland

4.4%

10

Seattle-Tacoma

4.3%

Markets just missing the cut-off point to rank as top 10 rent growth
performers were Detroit, West Palm Beach, Austin and Orange County.
Pricing rose 3.7 to 4.1 percent in each of those locales.

Las Vegas was the country’s sole large market that completely missed out
on rent growth in 2012, as prices were cut 1.7 percent. Sizable spots
with rent change barely in positive territory were Virginia
Beach-Norfolk, New Orleans, Riverside-San Bernardino and Atlanta.

While apartment deliveries in 2012 remained fairly limited by past
standards, construction starts did accelerate rapidly throughout the
course of the year. The number of apartments under construction at the
end of 2012 climbed to 224,000 units across the nation’s 100 largest
metros. Some 149,800 of those units are in properties where building is
scheduled to wrap up in 2013. The number of units under construction now
nearly matches the historical norm maintained from the mid-1990s to
2008. However, the distribution of the future supply is far different
from the typical pattern, according to the MPF Research analysis.

Markets across Florida plus Atlanta, Phoenix, Las Vegas and
Riverside-San Bernardino haven’t fully recovered from the downturns
experienced during the recession. Thus, building remains appropriately
restrained and well below historical norms in those locales. Those
markets, which accounted for just over a fourth of all apartment
construction that occurred in the nation’s top 100 metros prior to the
recession, now represent just 13 percent of ongoing building.

It’s largely business-as-usual in the nation’s comparatively
fast-growing economies where barriers to construction traditionally
have been moderate to minimal. Building activity is very similar to
pre-recession norms across most spots in Texas, the Carolinas,
Tennessee and Denver.

Very early in the cycle, developers pounced on quite a few places
traditionally thought of as the nation’s most difficult building
environments, so near-term completions now are scheduled to come in at
levels well above the historical norms in places such as New York, the
Washington, D.C. area, San Francisco, San Jose, Orange County and the
urban cores of Seattle, Chicago and Boston.

Looking beyond what’s under construction now, the backlog of projects in
the planning stages is very large, according to the MPF Research
analysis. “It wouldn’t be surprising to see starts come in at 250,000 or
more units in the country’s biggest metros during 2013,” Willett said.
“By the end of this year then, ongoing construction, inclusive of the
74,000 or so units now underway that won’t finish until 2014, probably
will be getting close to the high-water mark posted during the past
couple of decades.” That earlier cyclical peak was 357,000 units under
construction across the nation’s 100 largest markets as of late 1999.

Although MPF Research has some concerns about a brief supply-related
bump in the road for the apartment market’s performance during 2014 and
perhaps 2015, look for 2013’s performance to prove similar to the 2012
results. “Most places are starved for new product right now, so
properties that will complete over the coming year appear likely to do
incredibly well, generally without hurting the results for the existing
stock,” Willett said. Just having product moving through initial
lease-up will translate to a tiny slide in overall occupancy, but the
market should remain essentially full.

The firm expects rent growth to again register at about 3 percent, with
the potential there that the number could prove a bit higher. “Operator
attitudes will influence the final number,” Willett said. “Increasing
deliveries will stimulate more leasing activity, and an upturn in the
number of people coming through the front door can trigger more
confidence on the part of property managers, even if overall occupancy
rate isn’t moving in a meaningful way. Also, even the moderately
stronger job growth volumes that most leading economists are
anticipating during the second half of the year could help alleviate the
uncertainty about future demand prospects that some apartment operators
exhibited when setting prices over the past year.”

About RealPage

Located in Carrollton, Texas, a suburb of Dallas, RealPage provides
on-demand (also referred to as “Software-as-a-Service” or “SaaS”)
products and services to apartment communities and single family rentals
across the United States. Its on-demand product lines include OneSite®
property management systems that automate the leasing, renting,
management and accounting of conventional, affordable, tax credit,
student living, senior living and military housing properties;
LeaseStar™ multichannel managed marketing that enables owners to
originate, syndicate, manage and capture leads more effectively and at
less overall cost; YieldStar® asset optimization systems that enable
owners and managers to optimize rents to achieve the overall highest
yield, or combination of rent and occupancy, at each property; Velocity™
billing and utility management services that increase collections and
reduce delinquencies; LeasingDesk® risk mitigation systems that are
designed to reduce a community’s exposure to risk and liability;
OpsTechnology® spend management systems that help owners manage and
control operating expenses; and Compliance Depot™ vendor management and
qualification services to assist a community in managing its compliance
vendor program. Supporting this family of SaaS products is a suite of
shared cloud services including electronic payments, document
management, decision support and learning. RealPage’s MyNewPlace®
subsidiary is one of the largest lead generation apartment and home
rental websites, offering apartment owners and managers qualified,
prospective residents through subscription, pay-per-lead and LeaseMatchTM
pay-per-lease programs. Through its Propertyware subsidiary, RealPage
also provides software and services to single-family rentals and low
density, centrally-managed multifamily housing. For more information,
call 1-87-REALPAGE or visit www.realpage.com.

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